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Macroeconomic Analysis 2003. Convergence or Conditional Convergence. Contents. Definition of Convergence and Divergence Evidence of divergence among UK regions Labour and capital mobility and convergence Steady State in Autarky and Globalisation Evidence for Conditional Convergence
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Macroeconomic Analysis 2003 Convergence or Conditional Convergence Lecture 7
Contents • Definition of Convergence and Divergence • Evidence of divergence among UK regions • Labour and capital mobility and convergence • Steady State in Autarky and Globalisation • Evidence for Conditional Convergence • Poverty Trap: why pigs cannot become elephants? • Does more trade lead to convergence? • Results of growth studies • Exercises Lecture 7
Meaning of Convergence and Divergence Poor country should grow at faster rate then a rich country Experience of African countries Lecture 7
Two concepts of Economic Convergence Mean Differerence Dispersion Measure Standard Deviation Low income regions should grow faster than high income region Lecture 7
Evidence for Lack of Sigma and Beta Convergence in the Per capita Income among the UK Regions, 1993-1998 Lecture 7
Marginal productivity of Capital in Rich and Poor Countries and Capital Accumulation in Autarky MPKP MPKR rp rR KP KR Lecture 7
Marginal productivity of Capital in Rich and Poor Countries and Capital Accumulation After Globalisation MPKP MPKR rP rp RG rR KP KR Lecture 7
Marginal productivity of Labour in Rich and Poor Countries Before and After Globalisation MPLP MPLR wR wR’ LP LP’ LR LR’ Lecture 7
Who Gain and Who Lose From Globalisation? Capitalists in rich countries and workers in poor countries gain. rp rR MPKR MPKP wR wp’ wR’ MPLR MPLP’ wp MPLR’ MPLP Lecture 7
Savers Households, Corporations and Government Intermediaries Banks, Insurance Companies, Building Societies, Trusts, Stock and Bonk Markets Investors Small, Medium and Large Private, Public, Domestic and Foreign Lecture 7
Factor Mobility and Convergence Lecture 7
Factors Promoting Convergence • Domestic factors • Saving • Investment • Population growth rate • Human capital • Technology • Development of infrastructure • Sound economic policy • Homogenous and stable society • Transparent rules and regulations • Global factors • Trade of goods and services • Inflow and outflow of capital • Emigration or immigration of skilled and unskilled labour • Adoption of better technology • Growth of the global economy • Peace/Oil prices Lecture 7
Autarky and Saving and Capital (Gartner (2003:262) has similar example) Lecture 7
What is the capital stock in the steady state in A and B if there is a free mobility of capital? Impacts of Globalisation in Output and Income Lecture 7
Evidence for Beta-Convergence in Europe: Growth Rate of Per Capita Income and Its level in 1960 Lecture 7
Lack Evidence of Convergence among Middle and Low Income Countries:Average Annual Growth Rate of Per Capita Income (%) and Its level in 1960 Conditional Convergence Lecture 7
Japan had lower income in the beginning and had an astonishing growth rate from 1960 to 1990 and it overtook all OECD countries in per capita income France, Germany UK and USA show significant process of convergence Lecture 7
Disparity in GNP Per Capita at Purchasing Power Parity,2001 (US $): A Lot of Divergence Lecture 7
Output gap% =100*[(Trend GDP-Actual GDP)/Actual GDP] Lecture 7
Evidence for Conditional Convergence Across All Countries Low income countries grow slower than middle income countries, which grow faster than high income countries. Conditional Convergence Lecture 7
Why the investment rate is not the same across all OECD Countries? Feldstien-Horioka Puzzle Lecture 7
Conditional convergence Lecture 7
Poverty Trap Lecture 7
Is this caused by the barriers to adopt a good technology? Or by Lauddites? Lecture 7
Can a Penguin become a Cat or a Pig become an Elephant? Lecture 7
Increasing Return, Poverty Threshold and Stability of the Steady State y=f(k) y I =(n+d)k a Points b and o are unstable steady states sy b Big Push o k2 Poverty TH k1 k0 Poor SS Lecture 7
Critical Capital Stock for Control in Population Growth Rate yH b a yL nH> nL KH PovTH Kss Low ss trap Lecture 7
Economic Growth Policies Lecture 7
Policy Issues:Tax, Saving and Consumption • What is the impact in consumption and saving in the above model • If there is a 20 percent tax on interest income? • If there is a 20 percent subsidy in it? • What sort of tax system is better for increasing the ratio of saving? Does a higher rate of VAT promote saving or consumption? • Does a higher rate of tax on labour income encourage or discourage saving? • Does a higher rate of tax on pension income increase saving or consumption? Lecture 7
Exercises • Calculate annual growth rates between 1960 and 2000 across G7 and for countries with growth miracles and growth disasters • Calculation of positive externality and economic growth (Spill-over Effects). • Closing the productivity gap • Conditional convergence Lecture 7
